A Tough Job at a Big Tech Fund

January 31, 2002

By Robert Barker With the recent departure of Charles "Chip" Morris from the helm of T. Rowe Price Science & Technology Fund (PRSCX), many of the $5 billion fund's investors may be wondering about the new guy who took his place. That's Michael Sola, a 32-year-old technology analyst who has been with TRP since 1995 and managed the firm's Developing Technologies Fund (PRDTX).

The Science & Technology Fund, which just two years ago ranked as the nation's largest tech-only fund, with $12.3 billion in assets, has underperformed its peer group since 1996. Analysts at Morningstar have been especially critical of that performance. To get the Chicago-based research firm's assessment of the fund's outlook, I spoke by phone with Morningstar analyst Christopher Traulsen. Edited excerpts from our conversation follow:

Q: What's your take on Mike Sola?

A: My take is really that he is very cognizant of the limitations of the fund. [Because it's] one of the larger funds in the technology category, it's not especially maneuverable. Part of the problem in the last couple of years was that they tried to get a little more aggressive. I think [because they're such a large fund] they weren't able to unwind fast enough some positions that started to head south. Now you'll see a little more diversification and a little more caution.

Q: Is the fund too big to succeed?

A: I don't think that's necessarily so. Several large tech funds have done quite well. Where large tech funds do not excel is in investing in small, emerging, cutting-edge areas.

Q: How do you expect Sola to run the portfolio differently than his predecessor, Chip Morris?

A: Chip Morris had around 50 names in the fund, and Sola has the names up to about 75. The other thing you can expect -- and this started to happen before Chip Morris left -- is putting [more] health care into the fund. He has 10% or 11% of the fund in health care, about evenly split between big-cap pharma and biotech names.

Q: So with this greater diversification, do you expect that the fund will be less volatile under Sola?

A: It's too early to say yet. [Relative to the general run of funds] it's still going to be an extremely volatile animal -- technology funds are. It wasn't particularly volatile [for a tech fund] under Chip Morris.... And then it got caught trying to buy on the dip when the tech sector started to crack in 2000 and went into some aggressive names that he thought would come back.

Q: What advice do you have for folks who hold the fund in a regular taxable account?

A: It depends on how long you've held it for. If [you have losses], obviously taxes aren't a concern for you. But if you've got gains in it, I don't think there's any reason to get up and go at this point.... If you've stuck with it this long, then I would be inclined to give Mr. Sola and his team the benefit of the doubt.

Q: Why?

A: They look like they're making the right moves. Their moves are in keeping with the fund's large asset size. They seem to be cognizant of running a fund with that limitation in it. On the other hand, if what you want is a fund that can navigate between subsectors and make quick shifts and be heavily invested in smaller companies, clearly this isn't the fund that can do that. It hasn't been for some time.

Q: Are there other funds that you think would work better?

A: If you want a sort of good, solid broad technology fund, Fidelity Select Technology (FSPTX) is always a reasonable bet. All the Fidelity sector offerings change their managers pretty frequently, so for a taxable account I might be a little careful.

Q: And you have to pay a load on those Fidelity sector funds, don't you?

A: Yes, that's the other thing, you have to pay a 3% load, and it's not as if you're paying that for advice. It's just going to Fidelity.

Q: Other choices?

A: Northern Technology (NTCHX) is a management team we respect. Another one we think highly of is Dresdner RCM Global Technology (DGTNX). They've actually been pretty tax-efficient over the years. It might be a slightly better choice. There also are some technology index funds, as well as some technology exchange-traded funds.

Q: T. Rowe Price Science & Technology is listed as an investment option in many 401(k) plans. Any advice for those investors?

A: Well, it depends on what your choices are. If this is your only choice in your 401(k) plan, I certainly think it's a worthwhile offering still. T. Rowe Price has a good technology team there and, yeah, Chip Morris is leaving, but he hasn't done particularly well in the last couple of years.

Michael Sola appears to be very engaged in figuring out what the limitations of the fund's structure are and investing accordingly. And I think that's about the most positive sign we could ask to see at this point. Will he succeed? It's a little too early to tell, but he has great resources to draw upon. Barker covers personal finance in his Barker Portfolio column for BusinessWeek. His barker.online column appears every Friday, only on BusinessWeek Online